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(Kitco News) – Gold could continue to be the investment of choice in the global currency market as nations race to the bottom to devalue their money, a move that one economist thinks is a bad idea.

Governments are “delusional” if they think that it will promote economic growth, explained Steve Hanke, professor of applied economics and co-director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University.

In a recent commentary published on the Cato Institute website, Hanke wrote, “[E]conomists and political leaders have been deceiving the public on the advantages of currency devaluations for centuries,” he wrote. “Contrary to the common man’s conclusion, a devaluation will often result in a reduction of exports and a deterioration in a country’s trade balance and balance of payments.”

Currency devaluations are unable to stimulate growth, because they generate “retaliatory” polices from other nations, creating a currency war, he said. Hanke noted that this problem was first highlighted in 1947 by Joan Robinson, the don of Cambridge at the time. “Among other things, Robinson wrote that a devaluation would prompt a retaliation in the form of a competitive devaluation. Thus, the initiator of a currency war could, and would, always be neutralized — checkmate,” said Hanke in his analysis.

He added that current economy evidence also does not support the current devaluation theory. China, which has been at the center of the latest currency war, saw higher exports between 1995 and 2014 as the yuan appreciated against the U.S. dollar.

While currency devaluations may not generate economic growth, it may lead to higher inflation, which is good for gold prices, Hanke highlighted.

“If we measure the strength of local currencies by the price of gold in those currencies, a virtual one-to-one relationship between the increase in the price of gold in a local currency [a weakening currency value] and a country’s annualized inflation rate exists,’ Hanke said in the commentary.

In an email response to Kitco News, Hanke said that he is expecting gold to hold its purchasing power better than fiat currencies: “hence, the term ‘golden constant,’” he said.

http://www.kitco.com/news/2016-04-06/Only-Gold-Wins-In-A-Currency-War-Johns-Hopkins-Economist.html   (GoldMoneyAssets.com)

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